A friend of mine here argues that it’s better to live in an overlawyered, hyper-litigious society (where someone else is liable when you spill coffee on yourself) rather than the alternative. For example – number of sprinklers I’ve noticed in China: 0. Not sure if I’ve seen many fire alarms either, for that matter. 

This is all fun and games until someone flies out of a building: four girls recently died in Shanghai after jumping from a fire in their dorm. Chinasmack provides translation of one of the posts, as well as links to news reports in English. This got me pondering – does provision of safety result only after sufficient societal wealth exists to provide for preventative measures? Put another way, do prematurely legislated safety requirements raise costs resulting in relatively more harmful unseen consequences? Unconvincing: a rope-ladder would have saved these girls’ lives, and surely a rope ladder costs less than the expected lifetime contributions of four university graduates. 

[Disclaimer: my own 4th floor apartment has window cages, making egress in a hurry impossible. These are apparently to prevent acrobatic break in? Being roasted alive in a window cage will make a unique cross cultural obituary.]

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The financial crisis has afforded an excellent opportunity to witness numerous retreats to ideological preconception; broadly divided between asinine generalities like: “Bush did it!” / “government intervention caused the crisis!” / “corporate stooges are evil!” Being a member of the corporate stoogery school of thought, these events have forced a painful evaluation of deeply held beliefs. Instead of nuance though, perhaps subscription to a new mantra is in order.

Niall Furgeson has an excellent article in Vanity Fair (who knew there was a reason to subscribe to Vanity Fair other than to impress guests with your acute cultural awareness?) One line that’s been appearing over and over again is the crisis’ intimate connection to rapid growth in Asia in the past decade. Even if not the single most important reason, the narrative still dovetails with a Sino-centric world view:

The benefits for the United States were manifold. Asian imports kept down U.S. inflation. Asian labor kept down U.S. wage costs. Above all, Asian savings kept down U.S. interest rates. But there was a catch. The more Asia was willing to lend to the United States, the more Americans were willing to borrow. The Asian savings glut was thus the underlying cause of the surge in bank lending, bond issuance, and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge-fund population explosion. It was the underlying reason why private-equity partnerships were able to borrow money left, right, and center to finance leveraged buyouts. And it was the underlying reason why the U.S. mortgage market was so awash with cash by 2006 that you could get a 100 percent mortgage with no income, no job, and no assets. 

“Reassessing China’s Sovereign Risk: Emerging Global and Domestic Trends Threaten the ‘Chinese Miracle’” (via Global Association of Risk Professionals); Kevin O’Brien (President of Sovereign Advisors) argues that China has bitten off more than it can chew. He makes the case that the amount of non-performing loans (不良贷款) in China’s national banks are vastly understated – largely from unrecorded transfers to other State Owned Enterprises. He further asserts that Moody’s, Fitch, and S&P have artificially inflated China’s credit rating:

… Logically, you might ask how the three primary NRSRO’s have thus far been able to escape and immediate enforcement action for publishing knowingly false, misleading and injurious ratings in the instance of China. The answer is directly related to the fact that, until very recently, the agencies have been exempt from the regulations by the United States Securities and Exchange Commission (SEC) and have operated outside the supervisory jurisdiction of any other regulatory body. The rating agencies claim to be “publishers” whose ratings constitute “editorials,” thus invoking the right to free speech…

Thankfully we haven’t any problems with the ratings agencies yet. None at all… 

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The 2008 EFW Report is out, and Hong Kong, Singapore, and New Zealand are the top three performers. The Report, published by the Economic Freedom Network and the Fraser Institute, contains five social indicators: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation. Included in this year’s Report is an article entitled Economic Freedom and World Poverty by Seth Norton and James Gwartney. I’ve written an article on Africa’s performance in the 2008 Report. Check it out here.

Also, if you’re interested, you can check out the Free Market Foundation website at any time, www.freemarketfoundation.com.

Average China-guy and Tony have fairly similar views on international trade issues – allow China to peg / float the currency however it wants, remove tariffs on lots of things… Which is why it came as such as surprise when someone mentioned “Harbin’s local medicine protection tariffs.” Huh-wha? I must have misheard, so I asked for clarification: additional taxes are often selectively applied on the sale pharmaceutical products [in Harbin] not made by Harbin Pharmaceutical Group, justified for purposes of ‘quality control’? (Officials here can more easily monitor the output of HPG; can’t be sure of that trashy herbal stuff produced in Shanghai – so go the anecdotes). 

There’s definitely more to the story locally, and I plan to investigate. From what I can deduce so far, it’s linked to tax codes such that local governments can apply the highest tax rates to locally owned enterprises – thus the strong incentive to have such enterprises also feature the highest profit margins.

From its rhetoric, the central government strongly opposes these sorts of policies – insofar as they are related to local corruption:

… the local governments rely on local industries for tax revenue. It is thus conjectured that the local governments want to protect industries that have high tax margins… due to the lack of rule of law, even profits of privately owned enterprises are subject to some degree of expropriation, in the form of ad hoc taxes and fees, by the local governments…

That comes from Local Protectionism and Regional Specialization: Evidence from China’s Industries (Bai et al. 2003, SSRN here). 

Data is always a problem; I’ve spent some time Baidu’ing for 地方保护主义 (‘local protection belief’) and come up with very little. This paper ( ”Regional Protectionism in China: Direct Micro Evidence,” SSRN here) utilizes survey results, and finds that regional protectionism has been decreasing over time. They conclude:

… Especially worrisome is that poor provinces such as Yunnan, Guizhou and Shaanxi experienced the highest level of regional protectionism… Third, the past two decades have witnessed a declining trend in regional protectionism, and the decline was gradual over time. This runs counter to some of the recent findings that suggest increasing segregation in domestic markets. Fourth, the gains from removing regional protectionism are significant. For instance, the average increase in revenue for the worst sufferers of regional protectionism would increase revenue by 9.1%, while the mildest sufferer would increase by 3.5%…

Fascinating. Further investigation required. If good data is available, examining regional impacts of protectionism could potentially remove biases inherent in examining cross country differences (where it’s very difficult to find representative variables for ’soft institutions.’) That being said, similar biases certainly  exist within China, but are probably not as pervasive as those found internationally.

Not again. DHS recently extended the time foreign students can stay in the US (albeit only in “science and technology” fields – meaning you’ll probably see fewer foreign students in post-modern feminist lit classes):

The DHS extended from 12 months to 29 months the length of time a graduating student in science and technology fields can stay in the U.S. without a worker visa. Microsoft and other supporters of a higher cap on H-1B immigrant worker visas have complained that the quota fills up before students graduate each year and that the 12-month period didn’t give those students enough time to become part of the next year’s H-1B crop.

To which our enlightened society of rent-seekers responds:

The Bush administration’s recent decision to extend the amount of time foreign nationals can work in the U.S. on student visas is being challenged in a federal lawsuit by H-1B visa opponents.

… The suit, filed in U.S. District Court in Newark, N.J., by the Immigration Reform Law Institute and joined by The Programmers Guild and other groups, charges that the administration’s decision in April to extend the work period for students under the Optional Practical Training provision is little more than an effort to get around the H-1B cap limit.

Get around the H-1B cap limit? Yes. H-1Bs are such low hanging fruit. The US is already a massive exporter of education – why not keep more of it here? According to numerous anecdotes, the scarcity of H-1Bs is responsible for numerous foreign graduates taking low-paying jobs in return for sponsorship by these large corporations – but I don’t see how making it easier to apply for an H-1B helps this argument. It may allow other companies that don’t have as regimented an application support process to seriously look at hiring foreign graduates of U.S. universities. Though small, these types of changes are important steps to fundamentally changing fortress-ammurika immigration policy.

And still people oppose it. Throughout the last decade it’s sickening how much U.S. citizenship has turned into another element of unearned privilege. 

James Surowiecki has a great article in the New Yorker arguing that lower-income Americans enjoy the benefits of free trade with China far more than the wealthy because they spend a greater portion of their budgets on manufactured items; the sort that come (cheaply) from China. He concludes:

… the reality is that if we toughen our trade relations with China the benefits will be enjoyed by a few, since only a small percentage of Americans now work for companies that compete directly with Chinese manufacturers, while average Americans will feel the pain—in the form of higher prices—far more quickly and more directly than rich Americans will. Obama and Clinton, in their desire to help working Americans—and gain their votes—are pushing for policies that will also hurt them.

… and it’s also helping to lift millions (of Chinese workers) out of abject poverty. I harp on that a lot, but my suspicion is that 150 years from now, our descendants will look on this sort of system (destiny being primarily dependent upon the country one happens to be born in) much the same way we recoil in horror at the suggestion that the slave trade was somehow justifiable. 

Old city Shanghai, picture taken November 2005.